- Hey everyone, Clint Coons here
and in this video, we're gonna discuss taxation
of your rental real estate limited liability company.
All right, let's get started.
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Now I get a lot of questions on setting up LLCs,
how am I gonna be taxed on the income
that the LLC is generating?
And it really depends, first off on what level
of taxation you elect for that limited liability company.
So if you don't recall, LLCs they're hybrid entities
so you can choose to have your LLC set up
as a C corp for federal tax purposes,
it can be set up as an S corp for federal tax purposes,
it can be set up as a partnership for federal tax purposes,
or it can be disregarded, All right?
Now, what is the distinction between these?
Well, with the exception of the C corporation,
all of the other three statuses
are what we've called flow-through (indistinct).
These two are flow-through right here
and then this one means nothing,
I'll explain that.
So then S corporate partnership, the way it would work,
if I have my limited liability company set up,
here's my LLC
and my LLC generates 20K in income for the year.
So I make $20,000 in income.
And I am the owner of this LLC,
I'm it's sole member,
or maybe my wife and I are members together,
it doesn't matter.
It makes $20,000 and it's inside the LLC
and I don't take the money out.
I'd leave it in the LLC.
From a federal tax standpoint,
what's gonna happen?
Well because the S corp and the partnership
are considered flow-through,
your LLC will file a tax return,
it has to file a tax return.
If it's an S corp, it's gonna file on 1120S
if it's a partnership, it's gonna file a 1065 return.
So you're gonna file tax returns for it
and you're gonna receive the K-One
that allocates to you your portion of this income.
So if I own this entity with my wife
and we're set up,
well, the way she likes it, she's 90%, I'm 10%.
So it's set up this way.
Then if we have $20,000 inside of there,
she's gonna receive the K-One
for her share, which is everything, 18,000
and I'm gonna get my share for 2K.
So that will come down on a K-One to me.
So we get this K-One that shows she gets one,
I receive one of our taxable income,
the income that this company kicked out to us.
Now, note, I left the money inside of there,
I never pulled it out.
Do I have to pay tax on that?
Absolutely I do.
So this is the thing about LLCs many times
that people get confused about.
When an LLC is set up as an escort,
but set up as a partnership
or this disregarded status, which I didn't talk about
and the reason I didn't have mentioned it yet
other than throwing it up on the board
is that when it's disregarded
you don't have to file a tax return,
it just automatically hits your tax return
as if you owned it in your own name,
it's just ignored.
You get an EIN, you tell the IRS, hey, I got an LLC
but don't pay any attention to it.
It's not there,
you do a Jedi mind trick,
I don't have an LLC for tax purposes.
And so then your CPA would just fill it out your tax return
as if you own that property in your own name.
Now, what does this mean when the money
is still inside there though?
Because that's the most challenging aspect
for so many investors, understanding how taxes work.
So you're gonna pay taxes on this 20K.
Now where's that money gonna come from?
Well, maybe you got money in your savings account
or your checking account,
that's where it's gonna come from.
Or you could pull it out of the LLC if you wanted to
if you take it out
that is referred to as a distribution.
So the money inside of there, your taxed on it
even though you don't pull it out.
So what does that mean
let's say, the following year?
So the next year we've got this structure set up.
Let me just get rid of some of this stuff here.
I've got this structure set up.
It's got 20K inside of the LLC,
and here we are in March
and my wife and I decide, hey, let's go on a vacation.
Okay, great, let's go on a vacation.
We're gonna go to Hawaii
and we're going to rent a house
and so for this vacation, we need $7,000.
But our checking accounts is a little low right now
our savings account doesn't have it
but we have this LLC that has $20,000 inside of there.
So what do we do?
Do you pay for it with the LLC?
I hope the hell not, all right?
Because that's, co-mingling
that'll get your veil pearsed
and I've probably cut a video
on what you should and shouldn't do on that.
But what you would do is you would take a distribution
to yourself.
So you would come up to the LLC
and you'd pull out $7,000 as a distribution. Okay.
Now, when you take this $7,000
out of the LLC as a distribution,
it's not taxable to you.
Why? Because you paid tax on that $20,000
the previous year.
So you're not gonna get taxed twice on this money.
Think of it like a savings account, okay?
You have a savings account
and you have $50,000 in your savings account
and your bank paid you a whopping $200 in interest this year
on your savings account.
Do you pay federal income tax on that money?
Yes, it's interest income to you.
You didn't pull the money out of your savings account.
Next year,
you take that $200 out of your savings account
so you can go out to dinner.
Do you pay tax on that $200?
No, it's the same way it is
with the limited liability company with the money you earn.
You're gonna pay tax on your earnings.
We don't pay attention to how much money
you take in and out of the company.
Here's another example that comes up
an awful lot that confuses people.
Let's assume that I have LLC set up here
and I have a property inside of it
and we have two members down here again in this LLC
and I refiled my property.
So I go through it alone,
I get a refi in the name of the LLC.
So the LLC, I refi, I pull out $80,000 in cash
and I put it my limited liability company
on that refi to cash out refi out of that property.
And then I turn around
and I distribute the 80K to us as a distribution.
Is that taxable?
Now this comes up a lot.
People say, well, you took 80K
out of your limited liability company
so yes, that's taxable to you.
Again, as long as your LLC is set up
with one of these three tax statuses right here,
it's not taxable to you.
Why? Because this was a cash out refi,
that was a loan to your limited liability company.
So with the loan when you're pulling the money
out of the LLC it's no different than
if you borrowed the money yourself. Okay?
If you borrowed the money yourself
then out of your own house,
that's not taxable, okay?
Because you have to pay it back.
So it's not considered to be income.
Now let me put a little curvey out there
'cause I know it was gonna be one or two, three people
that watched this video and say, well,
Clint S corporations ain't tax basis. I know.
So with S corporations,
that may be a little different
but I'm not gonna go down into the weeds that much.
I just wanna give you the basics here
so you understand that when you take money out of the LLC
you don't have to worry about taxation.
That's not how these entities work.
Taxation is based upon the income.
In fact, many times
when we set up limited liability companies
for real estate investors
and let's assume that the LLC
so we're no longer with a loan situation here,
let's say it's generating $2,000 a month in income
and they're pulling that income out every month
the 2K's coming out to them.
So over the course of 10 months
they pulled out 20K that they start asking, well
do I need to pay and expected,
do I have to make an anticipated tax payments
on this quarterly tax payments on this money?
And I tell them, well, not really yet
because we don't have any history there to know
whether or not this is actually gonna be taxable to you.
And people are shocked, they go,
what do you mean it's not taxable to me?
I took 20,000 out of my LLC.
I know, but with real estate, it's a little different
because even though you took $20,000 out,
until we do your taxes,
we don't know how much of that's gonna be offset
by depreciation.
So let's assume that you had a $12,000 in depreciation
and you had $4,000 in taxes, so that's 16.
Now we're down $4,000 of taxable income,
but then you had some repairs
and management fees of $4,500
so actually you lost 500 bucks when we do your taxes.
Do you really wanna pay taxes on money that you lost?
No, I think not.
So when you're taking the money out,
don't get too hung up on that.
With the LLC, it's a flow through entity
unless it's a C corp.
Now that is a totally different animal
and it doesn't pertain to this
because everything I just told you
if it's set up as a C corp, you're gonna get taxed.
So we like then to use residential real estate
through flow-through entities.
And typically the way we're gonna structure them
is we're gonna go with disregarded or partnership.
Those are the main two workhorses
for residential real estate investors
or commercial or multifamily,
that's how we wanna go.
If it's a flip, we're gonna go with the C corp
or maybe an escort,
preferably I always C in my opinion for those types.
So the idea here is just to get a basic understanding
of how the LLC works from a tax standpoint
how you can pull money in and out
and don't get hung up on these distributions.
Distributions do not equal taxation.
Taxation is only based
upon the income that the business makes
not the money you're pulling out.
'Cause you're gonna pay tax on it no matter what
at the end of the day,
they don't care how much you pulled out
or when you pulled it out.
If there's taxable income there, you pay tax on it,
if you don't, you don't.
So use this going forward,
so hopefully it helps you understand how LLCs are taxed.
Hey, if you'd like to video, give me a like
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Take care everyone.
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